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Postponing and Avoiding Taxes: Good News for Smart Estate Planning

By Sarah Weldman, Staff Writer

The Domestic Private Annuity Trust

Estate Planning can seem like a complicated task, but it doesn't have to be. As with any type of financial situation, there are rules and regulations, and there are also strategies to help navigate said rules and regulations. Some of these strategies come in the form of estate planning options, like the Domestic Private Annuity Trust, which allows you to postpone and avoid certain taxes resulting from an estate sale or transfer of assets. Specifically, a Domestic Private Annuity Trust is an agreement between two private parties not in the business of issuing private annuities. The first party (usually the parent) makes an agreement with the second party (usually the children) to transfer property (generally in the form of a trust) in exchange for an agreement that the second party will make annual payments over the duration of the first party's (also known as the transferor) lifetime. With a Domestic Private Annuity Trust, there are options made available that are not always found in other types of trust agreements. Specifically, with a Domestic Private Annuity Trust you can:

Keep the profit from the investment proceeds of an asset sale as a lifetime annuity (and pay the income taxes over the course of your lifetime)

Postpone payment of certain taxes

Transfer appreciated assets to your children with no gift tax, which in turn, allows them to sell the assets without having to pay capital gains tax.

Leave the proceeds from an asset sale to your children upon your death What Are Some Additional Benefits of My Domestic Private Annuity Trus

As was previously mentioned, a Domestic Private Annuity Trust results in the transfer of assets without gift tax, and also, the absence of estate tax on the assets that are transferred, since the annuity comes to an end when the transferor passes away. In addition, any further appreciation of the transferred assets is shifted to the transferee, and perhaps most importantly, if the asset has appreciated in value, the taxes placed on this gain, which are the responsibility of the transferor, are deferred over the life of the lifetime annuity payments.

It should also be pointed out that if a transferor has a life expectancy that is less than the life expectancy defined by the IRS actuarial tables, the balance of the payments due to the transferor under actuarial tables is not subject to an estate tax. It goes without saying then, that the ideal candidate for a Domestic Private Annuity Trust is one whose health and family life expectancy history indicate a life expectancy beyond that of 18 months, but also less than what the IRS actuarial tables indicate.

The Domestic Private Annuity Trust: Planning for Your Family's Future

Estate Planning can be a complicated, multi-faceted undertaking and a Domestic Private Annuity Trust much be carefully structured in order to achieve a desired outcome. This is why it is a task best left up to your certified financial planner or tax professional, both of whom are up to date on current laws and codes, and can help you make the best decision for your continued financial security.